UNIVERSITY    OF   CALIFORNIA 

COLLEGE    OF    AGRICULTURE 
AGRICULTURAL   EXPERIMENT  STATION 

CIRCULAR  No.  222 

October,  1920 

Fundamental  Principles  of  Co-operation 
in  Agriculture 

By  G.  HAROLD  POWELL* 


A  co-operative  association  is  one  in  which  the  members  form  an 
agency  through  which  they  conduct  their  own  business  for  their 
greatest  mutual  advantage.  To  be  co-operative,  it  must  be  formed  of 
producers  exclusively,  and  managed  by  them,  and  the  benefits  must 
be  returned  to  them  in  proportion  to  the  patronage  of  each.  The 
capital  necessary  to  create  the  agency  and  its  facilities  should  be 
contributed  by  the  members  in  proportion  to  the  use  which  each 
makes  of  it.  Also,  the  capital  contributions  of  each  member  should 
be  kept  progressively  proportional  to  the  individual  shipments,  or 
purchases,  or  other  uses  made  of  the  agency,  as  nearly  as  this  may 
be  done. 

The  members  may  determine  in  each  instance — having  in  mind 
the  character  of  the  industry  and  the  necessities  of  production,  stor- 
age, manufacture,  distribution  and  sale — whether  a  producers'  organ- 
ization shall  be  formed  with  or  without  capital  stock,  whether  it  shall 
have  equal  or  unequal  voting  power  of  members,  or  whether  it  shall 
pay  interest  or  dividends  on  the  capital.  In  considering  the  distri- 
bution of  earnings,  it  is  also  fundamental  that  that  part  which  is 
used  as  a  dividend  on  the  paid-in  capital  should  not  represent  more 
than  a  reasonable  rate  of  interest  on  the  money  advanced  by  the 
members;  and,  of  the  balance,  if  there  is  a  net  earning  in  excess  of 
the  dividend  requirements,  a  small  part  may  be  placed  in  a  reserve 
fund  and  all  of  the  remainder  distributed  as  a  patronage  dividend — 
unless  other  withholdings  are  agreed  to  in  advance  by  the  members. 
Whenever  the  interest  or  the  dividends  are  considered  as  a  profit, 

*  General  Manager  of  the  California  Fruit  Growers '  Exchange ;  former  Assist- 
ant Chief  of  the  Bureau  of  Plant  Industry  and  former  Pomologist  in  Charge  of 
Fruit  Transportation  and  Storage  Investigations,  United  States  Department  of 
Agriculture;  and  in  charge  of  Perishable  Food  Division,  United  States  Food 
Administration,  during  the  war,  1917-1919. 


Z  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

earned  by  the  capital,  rather  than  as  a  fair  return  for  its  use,  the 
association  is  primarily  a  capitalistic  and  not  a  co-operative  organ- 
ization. 

If  it  is  a  co-operative  capital-stock  corporation  that  is  formed,  it 
is  fundamental  that  the  capital  either  be  contributed  by  the  members 
in  proportion  to  the  use  that  they  make  of  their  organization,  or  else 
that  there  be  a  reasonable  limitation  on  the  amount  of  stock  that  a 
member  may  acquire.  It  is  also  fundamental,  in  that  case,  that  the 
voting  power  of  members  be  equal,  or  else  that  the  voting  power  of 
each  member  be  regulated  within  reasonable  limits. 

THE    DIFFERENCE    BETWEEN    A    CO-OPERATIVE    ASSOCIATION    AND    A 
PROFIT-MAKING    CORPORATION 

There  is  an  essential  difference  between  a  co-operative  organization 
and  a  capital-stock  corporation  operated  for  profit.  A  capital-stock 
corporation  for  profit  is  founded  on  the  earning  capacity  of  the  capital 
invested,  and  that  investment  is  the  basis  of  administration,  and  of 
control,  and  of  the  distribution  of  earnings.  The  co-operative  organ- 
ization, on  the  other  hand,  is  founded  for  the  mutual  benefit  of  the 
members,  while  the  earnings,  or  profits,  are  returned,  not  on  the 
basis  of  the  capital  which  each  member  has  contributed,  but  rather 
on  the  volume  of  his  shipments,  or  his  purchases,  or  are  proportional 
to  any  other  use  which  he  makes  of  the  association.  The  foundation 
of  the  co-operative  association  is  men  and,  preferably,  each  member 
has  an  equal  voice  in  directing  its  operations ;  but  in  the  capital-stock 
corporation  for  profit,  the  foundation  is  capital  and  the  voice  of  the 
stockholder  in  its  direction  is  proportional  to  the  capital  contributed 
by  him.  Therefore,  a  co-operative  association,  as  contrasted  with  a 
profit-making  organization,  may  be  tested  by  the  motive  underlying 
its  operations.  In  the  former,  it  is  operated  for  the  mutual  help  of 
the  members ;  in  the  latter,  it  is  for  the  profit  or  advantage  of  the 
corporation  itself. 

CONFUSION  IN  THE  USE  OF  THE  TERM  "CO-OPERATION" 

There  is  much  confusion  in  the  use  of  the  term  "co-operation"  as 
applied  to  agricultural  affairs.  This  term,  because  of  its  popularity 
in  the  public  mind,  is  commonly  applied  to  any  group  of  farmers  who 
are  associated  for  business  purposes.  It  is  used  to  describe  voluntary, 
unincorporated  associations ;  or  incorporated  capital-stock  associations 
for  profit;  or  stock  corporations  with  reasonable  limitation  on  stock 
ownership,  and  also  on  the  voting  power  accorded  to  members,  and 


Circular  222        PRINCIPLES  OF  CO-OPERATION  IN  AGRICULTURE  3 

on  the  distribution  of  earnings;  and  again  to  organizations  instituted 
for  purposes  of  mutual  help,  without  capital  stock  and  not  conducted 
for  profit.  In  California,  for  example,  many  such  organizations, 
whether  they  are  formed  and  controlled  by  the  farmers  themselves 
or  by  others,  are  called  "  co-operative ? '  and  the  term,  because  of  the 
popular  misconception  referred  to,  is  capitalized  for  business  purposes. 
One  of  the  reasons  for  this  confusion  lies  in  the  fact  that  the 
various  states  have  not  enacted  uniform  laws  that  provide  for  the 
formation  of  co-operative  associations  of  farmers.  The  producers 
have,  therefore,  often  found  it  necessary  to  organize  under  the  general 
stock-corporation  laws.  Only  about  thirty-five  states  have,  to  date, 
enacted  special  laws  that  provide  for  the  formation  of  producers' 
co-operative  societies,  and  possibly  ten  states  have  legislation  that 
permits  the  formation  of  associations  without  capital  stock.  The 
state  laws  vary  widely  in  scope.  Some  of  these  special  stock-corpora- 
tion laws  are  very  general — leaving  the  details  of  management,  stock 
ownership,  voting,  and  other  matters  to  be  worked  out  by  the  organ- 
izations— while  in  other  states  the  laws  outline,  in  precise  detail,  the 
method  of  forming  an  association  and  of  conducting  its  business. 

THE    NEED    OF    LEGISLATION    RECOGNIZED 

There  is  a  growing  recognition  of  the  economic  need  of  organiza- 
tion by  producers.  The  farmer,  especially  the  small  land  owner,  can 
no  longer  deal  with  his  business  problems  as  an  individual  because 
he  now  has  to  cope  with  organized  industries  in  the  production,  dis- 
tribution, and  sale  of  his  crops.  If  he  is  to  meet  these  problems  suc- 
cessfully in  the  future,  he  must  join  with  his  neighbors  in  forming 
an  organization  through  which  they  can  solve  their  common  problems 
co-operatively,  and  he  must  have  laws  provided  that  will  enable  him 
to  do  this.  Now,  unfortunately,  the  legislation  enacted  by  the  federal 
and  state  governments  is  not  always  broad  enough  to  meet  the  social 
and  economic  needs  of  the  producer. 

Congress  fosters  agricultural  co-operation  by  making  appropria- 
tions to  the  Department  of  Agriculture  to  educate  the  farmer  to  the 
co-operative  idea,  and  many  of  the  states  appropriate  funds  with  a 
similar  end  in  view.  For  some  time,  the  federal  government  has  recog- 
nized that  special  legislation  is  needed  to  enable  producers  to  organize 
without  being  subjected  to  the  restrictions  that  are  alleged  to  govern 
capital-stock  corporations,  which  are  organized  for  profit  and  are 
doing  an  interstate  or  foreign  business.  In  the  Clayton  Act,  which 
applies  to  interstate  and  foreign  commerce,  provision  was  made  that 


4  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

nothing  in  the  anti-trust  laws  shall  be  construed  to  forbid  the  existence 
and  operation  of  argicultural  or  horticultural  organizations,  instituted 
for  the  purpose  of  mutual  help  and  not  having  capital  stock  or  con- 
ducted for  profit.  Congress  has  recently  considered  further  the 
necessity  of  organization  by  farmers,  on  a  broader  scope  than  the 
Clayton  Act  provides  for,  and,  to  balance  this,  has  proposed  to  give 
some  assurance  to  the  public  of  protection  against  the  possible  evils 
of  unrestricted  organization  by  producers.  In  that  case,  the  courts 
and  the  Department  of  Justice  would  have  the  power  to  enforce  the 
suggestions  and  regulations  of  the  governmental  agency  having  super- 
vision over  these  organizations. 

FORMS    OF    CO-OPERATIVE   ASSOCIATIONS 

When  the  states  shall  have  enacted  adaptable  laws  which  provide 
for  the  co-operative  handling  of  business,  it  will  not  be  material 
whether  a  co-operative  association  be  formed  as  a  non-profit,  capital- 
stock  corporation,  or  as  a  non-profit  corporation  without  capital  stock. 
The  essential  thing  which  a  group  of  producers  should  determine  is 
that  the  law  under  which  they  incorporate  actually  provides  for  the 
conduct  of  their  business  along  co-operative  lines,  and  that  the  statute 
is  adaptable  to  the  particular  kind  of  co-operative  business  which  they 
propose  to  transact. 

If  incorporated  as  a  capital-stock  corporation,  the  association  may 
still  be  co-operative  if  the  law  under  which  it  is  formed  is  general  in 
character  and  permits  the  members  to  direct  its  affairs  along  co-oper- 
ative lines ;  or,  if  the  method  of  voting,  and  the  method  of  transferring 
stock,  and  the  limitation  and  control  of  membership  or  of  stock,  and 
the  distribution  of  earnings,  or  gains,  according  to  co-operative  prin- 
ciples, are  all  specified  in  the  statute. 

If  the  organization  is  incorporated  as  a  non-profit  association  with- 
out capital  stock,  the  member,  instead  of  receiving  a  certificate  of 
stock,  is  issued  a  certificate  of  membership  which  can  not  be  trans- 
ferred or  assigned  to  any  other  person,  nor  is  the  purchaser  of  the 
property  of  a  member  entitled  to  membership  by  virtue  of  his  pur- 
chase. In  such  associations  the  method  of  voting,  and  the  control 
of  membership,  and  the  distribution  of  earnings  are  subject  to  rules 
made  by  the  association — unless  these  details  are  specified  in  the 
statute.  These  associations  may  provide  a  capital  with  which  to  con- 
duct their  operations,  such  capital  to  be  accumulated,  pro  rata,  from 
the  proceeds  of  the  shipments,  or,  from  membership  fees  apportioned 
on  the  bearing  acreage  of  each  member  or  on  his  present  or  future 
shipments,  or,  in  any  other  way  agreed  to  among  themselves. 


CIRCULAR  222         PRINCIPLES   OF    CO-OPERATION    IN   AGRICULTURE 


A    STOCK    CORPORATION    FOR    PROFIT    NOT   THE    FORM    FOR    A 
CO-OPERATIVE    ORGANIZATION 

The  stock  corporation  for  profit  is  not  a  desirable  form  under 
which  to  incorporate  a  farmers'  business  organization.  General  stock- 
corporation  laws  have  been  drawn  primarily  to  meet  the  requirements 
of  capital  and  not  for  the  benefit  of  the  members  of  a  co-operative 
agency.  The  membership  in  a  profit  corporation  is  not  usually  under 
legal  control,  because  the  right  to  transfer  or  sell  the  stock  is  a  legal 
right  incident  to  its  ownership.  Therefore,  a  stockholder  may  sell  his 
farm  and  continue  as  a  stockholder  in  the  corporation,  still  retaining 
the  right  to  examine  its  affairs  and  participate  in  its  management; 
or,  he  may  withdraw  from  the  association  and  still  retain  the  same 
legal  rights  as  long  as  he  owns  the  stock ;  or,  he  may  sell  his  stock  to 
some  one  not  interested  in  the  association  at  all  or  who  is  even  antag- 
onistic to  it.  There  is  no  legal  method  under  the  general  profit- 
corporation  laws  by  which  the  stock,  and  therefore  the  control  of  the 
organization,  can  be  confined  to  the  membership  after  the  stock  has 
been  issued,  unless  the  stockholder  has  agreed  in  advance  to  sell  it  to 
the  association,  if  allowable  under  the  laws  of  the  state,  or  to  turn 
it  over  to  a  trustee  until  it  can  be  resold  to  a  member.  Neither  is  the 
voting  power  of  the  stockholders  under  control,  unless  the  method  of 
voting  is  agreed  upon  in  advance — because  the  voting  power  is  gen- 
erally proportional  to  the  number  of  shares  held  by  each  stockholder. 
Nor  can  the  earnings  be  returned  to  the  members  as  a  patronage 
dividend  unless  agreed  to  in  advance  by  the  stockholders  and  unless 
the  stockholders  representing  the  majority  of  the  stock  actually  abide 
by  the  agreement.  The  practical  difficulty  in  incorporating  a  co-oper- 
ative association  under  the  profit-corporation  laws  lies  in  the  fact 
that  it  is  questionable  whether  all  the  above  mentioned  conditions 
agreed  to  by  the  stockholders  are  legally  enforceable  and  whether  the 
organization  might  not  possibly  cease  to  be  co-operative  whenever 
stockholders  representing  a  majority  of  the  stock  desire  to  exercise 
their  legal  privileges. 

Experience  shows  us  that  a  farmers'  association  that  has  been 
organized  under  the  general  stock-corporation  laws  is  on  an  unstable 
foundation,  not  only  because  the  stock  can  not  be  controlled,  but  also 
because  of  conflicts  that  may  arise  between  the  stockholders  and  the 
members. 

In  illustration  of  the  previously  mentioned  commercialization  of 
the  use  of  the  term  "co-operation"  there  are  many  so-called  "co- 


b  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

operative"  organizations  (shrewdly  formed)  that  make  a  profit  for 
the  corporation,  on  the  product  or  the  purchases  of  the  grower,  by 
retaining  the  control  of  the  facilities  through  which  his  business  is 
handled.  In  the  fruit  industry,  for  example,  the  packing  house  may 
be  owned  and  controlled  by  the  organizers  and  a  large  dividend  paid 
the  stockholders  and  other  withholdings  deducted  before  the  grower 
receives  his  returns.  A  profit  which  is  made  by  the  sale  of  supplies 
to  members,  and  earnings — made  in  various  indirect  ways — is  re- 
turned to  the  stockholders  as  a  dividend  instead  of  being  paid  to  the 
producer  as  a  patronage  refund.  Such  an  organization,  obviously,  is 
not  co-operative  because  it  is  not  formed  or  managed  for  the  mutual 
benefit  of  those  who  utilize  its  facilities,  but  rather  for  the  stockholders 
who  have  their  capital  invested  in  the  undertaking. 

FINANCING    A    CO-OPERATIVE    ASSOCIATION 

Unless  a  co-operative  association  of  producers  is  adequately  and 
soundly  financed,  by  its  own  members,  it  invites  disaster.  Two  kinds 
of  capital  are  usually  required :  a  permanent-capital  for  buildings  or 
other  facilities  and  a  working-capital  from  which  to  advance  money 
to  the  members  before  the  returns  are  received  from  the  crops,  and 
to  meet  the  running  expenses  of  the  organization. 

The  method  of  financing  will  depend  on  the  nature  of  the  organ- 
ization and  the  character  of  its  business.  If  it  is  to  be  equitable,  the 
capital  contribution  of  each  member  should  be  based  on  his  patronage, 
whether  it  be  in  purchasing,  storing,  manufacturing,  distributing, 
selling  or  other  activities.  In  California,  for  illustration,  a  group  of 
citrus-fruit  growers  who  build  a  packing  house  contribute  the  per- 
manent capital  either  by  stock  subscriptions  or  by  membership  fees. 
Such  contribution  is  subscribed  on  the  basis  of  the  bearing  acreage, 
the  shipments,  the  number  of  trees  or  the  other  unit  of  each  member. 
This  capital  contribution  may  be  made  in  advance,  or,  by  agreement, 
it  may  be  paid  out  of  the  proceeds  of  the  sales  of  fruit.  If  the  pay- 
ments are  clef  erred,  the  ■  association,  protected  by  the  subscription 
agreements  with  its  members,  gives  a  note  to  a  bank  and  obtains  the 
capital  immediately  needed  to  provide  the  facilities.  This  liability 
may  be  paid  off  when  the  subscriptions  are  received,  or  it  may  be 
deducted  from  the  proceeds,  or  both. 

The  working  capital  of  an  association  is  usually  obtained  through 
bank  loans  either  secured  or  unsecured  by  the  directors,  or  through 
loans  of  members,  or  through  the  credit  furnished  the  association  by 
negotiable  promissory-notes — which  in  turn  are  used  as  collateral  for 


CIRCULAR   222         PRINCIPLES    OF    CO-OPERATION    IN    AGRICULTURE  7 

bank  loans — the  credit  thus  loaned  by  each  member  having  a  pro  rata 
relation  to  the  use  he  will  make  of  the  association.  Working  capital 
is  also  secured  by  using  ' '  trade  acceptances  "  as  a  security. 

The  reason  the  capital  contributions  of  members  of  a  co-operative 
association  should  not  only  be  proportional  to  the  use  which  each  makes 
of  its  facilities,  but  should  also  be  kept  progressively  proportional  to 
his  uses,  is  in  order  that  the  capital  of  the  individual  member  may 
not  become  disproportional  to  his  activities  through  lapse  of  time 
or  as  a  result  of  changes  in  the  amount  of  his  patronage.  If  these 
capital  contributions  have  been  made  on  the  basis  of  acreage,  pur- 
chases, or  shipments,  a  plan  should  be  devised  to  keep  permanent 
payments  always  proportional  to  the  future  extent  of  a  member's 
business  and  provision  be  made  that  new  members  contribute  on  the 
same  proportional  basis.  To  effect  this  end,  the  members  may  agree 
to  a  redistribution  of  the  capital  from  time  to  time,  or,  if  so  desired, 
there  may  be  an  accumulation-fund  paid  in  on  a  basis  similar  to  the 
original  contribution,  such  fund  to  be  used  as  an  equalizer  of  the 
capital. 

A  certain  large,  co-operative,  capital-stock  organization,  known  to 
the  author,  which  furnishes  packing-house  and  orchard  supplies  to 
citrus-fruit  growers,  has  devised  a  method  of  redistributing  the  capital 
on  a  proportional  basis.  The  stockholders  agree  that  they  will  readjust 
their  stock  in  proportion  to  the  amount  of  fruit  which  each  shall  ship 
through  the  marketing  organization  to  which  they  belong-it  being 
acknowledged  that  the  shipments  of  fruit  provide  a  fair  basis  for 
determining  all  contributions  to  the  purchasing  organization.  Their 
agreement  provides  that  a  certain  amount  per  box  shall  be  deposited 
in  a  fund,  called  a  "revolving  fund,"  and  that  the  agency  which 
handles  it  shall  redistribute  the  stock  from  time  to  time  in  proportion 
to  the  shipments  of  the  stockholders.  Such  a  transaction  is,  in  effect, 
a  sale  of  stock  by  those  who  ship  less  fruit  to  those  who  ship  more, 
thereby  always  maintaining  among  the  stockholders  a  proportional 
equality  of  stock  ownership.  Instead  of  using  a  "revolving  fund," 
the  readjustment  of  stock  could  just  as  well  be  made  on  an  auditor's 
balance  sheet  similar  to  the  adjustments  of  a  clearing-house  in  settling 
with  its  member  banks. 

A    CO-OPERATIVE    ORGANIZATION    MUST    ORIGINATE    FROM    NECESSITY 

A  co-operative  organization,  if  it  is  to  be  permanently  successful, 
must  grow  out  of  economic  necessity  and  must  crystallize  around  a 
specific  economic  question.     The  reason  for  its  existence  must  lie  in 


8  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

some  vital  service  which  it  is  able  to  perform  if  it  is  to  have  strength 
enough  to  live  in  the  face  of  the  competition  to  which  it  will  be  in- 
stantly subjected.  It  will  have  to  compete  with  existing  organizations 
and  this  competition  will  be  directed  toward  its  elimination.  It  will 
be  vigorously  attacked  and  every  conceivable  form  of  misrepresenta- 
tion will  be  leveled  against  it,  and  every  weapon  known  to  competition, 
fair  or  unfair,  will  be  used  to  put  it  out  of  existence. 

The  average  farmer  is  not  a  business  man  nor  is  he  skilled  in  the 
arts  of  competitive  business.  He  is  naturally  a  strong  individualist, 
trained  for  generations  to  depend  upon  his  own  efforts,  conservative, 
slow  to  delegate  authority  over  his  affairs  to  any  one,  and  reluctant  to 
yield  any  part  of  his  individual  freedom  by  limiting  his  own  action 
or  by  conforming  to  that  of  his  neighbors.  When  he  is  faced  with 
the  skillful  arguments  of  those  who  aim  to  disrupt  his  organization, 
he  too  often  weakens  and  may  even  leave  the  association,  unless  he 
has  felt  the  pinch  of  hard  times  or  has  known  the  helplessness  resulting 
from  a  combination  of  those  who  buy  or  sell  his  products,  or  has  felt 
the  burden  of  excessive  freight  rates  and  the  effect  of  overproduction 
or  of  other  forms  of  oppression.  Unless  the  producer  has  an  abiding 
conviction  that  his  present  individual  methods  are  ineffective  and 
that  he  must  act  co-operatively  with  his  neighbors,  his  organization, 
no  matter  how  sound  or  perfectly  drawn  in  form,  will  lack  that 
cohesion  which  gives  an  enduring  spirit  to  co-operation.  The  co- 
operative spirit  must  grow  slowly.  It  is,  in  fact,  a  point  of  view,  and 
the  farmer  acquires  it  as  a  permanent  conviction  only  when  it  comes 
to  him,  step  by  step,  out  of  the  abundance  of  his  own  experience. 

THE     MEMBERSHIP    IN    A    CO-OPERATIVE    ASSOCIATION 

The  membership  in  a  co-operative  association  should  be  confined 
exclusively  to  producers  who  actual^  use  its  facilities.  Those  who 
contribute  capital  alone  should  never  be  admitted  to  membership, 
because,  as  already  set  forth,  the  capital  contribution  should  be  the 
medium  through  which  the  members  provide  the  facilities  for  the 
transaction  of  their  own  business ;  therefore,  it  is  never  desirable  that 
capital  be  furnished  by  non-producing  business  interests  which  would 
thereby  acquire  an  interest  in  the  corporation  and  a  voice  in  its 
direction,  though  organizations  have  been  formed  by  public-spirited 
business  men  who  realized  the  value  to  the  community  of  the  co-oper- 
ative movement  before  the  farmer  was  alive  to  the  need  of  organizing 
and  financing  his  own  operations.  Many  so-called  co-operative  associa- 
tions have  been  assisted  by  business  men,  dealers,  or  others  who  pro- 


CIRCULAR  222         PRINCIPLES   OF    CO-OPERATION   IN    AGRICULTURE  9 

mote  the  organization  simply  for  their  own  profit  or  as  a  means  of 
securing  a  hold  on  the  business  of  the  farmer.  But,  in  either  case, 
such  organizations  are  fundamentally  unsound  because  the  impetus 
to  co-operate  must  spring  from  within,  from  the  necessities  of  the 
industry,  and  not  from  without.  Membership  in  a  co-operative  associa- 
tion carries  with  it  a  responsibility  on  the  part  of  each  member  to 
maintain  it  in  periods  of  adversity.  The  farmer  must,  of  course, 
realize  the  necessity  for  the  organization  and  that  it  is  his  own  insti- 
tution, developed  and  managed  by  him  through  his  chosen  representa- 
tives, to  promote  and  protect  his  interests. 

Fairness,  the  absence  of  jealousy,  mutual  confidence,  and  loyalty 
are  fundamentals  in  successful  co-operation — and  the  will  to  co-oper- 
ate must  dominate  the  membership. 

One  of  the  vital  problems  that  a  co-operative  organization  always 
has  before  it  is  to  keep  alive  the  interest  of  its  members.  In  selecting 
directors  who  are  competent  to  represent  them  and  officers  who  are 
skilled  in  business  and  in  the  leadership  of  men,  the  growers  may 
acquire  a  feeling  that  their  association  is  an  outside  agency  formed 
to  transact  business  for  them  rather  than  one  which  they  themselves 
operate.  To  maintain  the  interest  of  the  grower,  directors'  meetings 
should  be  open  to  the  members  and  they  should  be  urged  to  attend. 
Also,  members  should  be  kept  posted  on  the  business  details  and  on 
the  status  of  their  industry.  Frankness  should  be  the  watchword 
of  the  management,  and  exact  justice,  a  square  deal  and  equality  of 
treatment  and  of  opportunity  should  be  the  attitude  of  the  directors 
and  of  its  management  in  all  their  relations  with  the  members.  Fre- 
quent membership-meetings  are  a  vital  aid  in  developing  the  spirit 
of  co-operation.  Discussions  of  the  business  problems  of  the  associa- 
tion, questions  that  confront  the  industry,  the  relationship  of  a  co- 
operative association  to  the  public;  social  features  which  diversify 
the  interest  of  the  business  meetings :  all  of  these  activities  develop  a 
community  spirit  of  co-operation  that  no  outside  influence  can  under- 
mine. 

THE    VOTING    POWER    OF    MEMBERS 

In  a  strictly  co-operative  organization,  the  "one-man-one-vote" 
principle  should  be  adopted  as  fundamental  though  the  objections  to 
unequal  voting  power  are  somewhat  lessened  where  the  financial  con- 
tribution of  each  member  is  made  proportional  to  his  use  of  the  organ- 
ization and  is  kept  progressively  so.  Under  these  conditions,  the 
number  of  votes  accorded  each  member  may  be  made  proportional  to 


10  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

the  capital  contributed  by  him  or  to  the  use  which  he  makes  of  his 
organization.  However,  in  the  case  of  members  with  very  large  inter- 
ests, it  is  advisable  that  some  limitation  be  placed  on  the  voting  power. 
Since  a  co-operative  association  is  an  operating  industrial  democracy 
in  which  the  members  trust  each  other  as  men  it  should  preferably 
be  founded  on  equality  of  membership — whether  the  member  con- 
tribution of  business  or  of  capital  be  large  or  small — because  neither 
the  capital  nor  the  volume  of  business  contributed  is  the  infallible 
measure  of  a  man's  fairness  and  judgment.  A  frank  recognition 
of  the  equality  of  membership  is  the  best  evidence  of  mutual  confidence 
in  co-operation,  because,  in  the  final  analysis,  it  is  the  members  who, 
as  men,  co-operate  in  these  organizations  and  their  success  depends 
on  their  belief  in  each  other  and  on  their  fairness  in  dealing  with  their 
mutual  business  problems. 

Therefore,  whenever  the  voting  power  of  the  member  is  increased 
in  proportion  to  his  capital  contribution  or  his  other  use  of  the  organ- 
ization, the  basic  principle  of  mutual  trust,  confidence  and  equality 
is  essentially  diminished  and  the  property  right  of  membership  is 
thereby  substituted  as  a  basis  of  direction  and  management. 

There  is  usually  a  strong  sentiment  against  the  "one-man-one- 
vote"  principle  when  first  presented  to  the  average  producer;  the 
large  contributor  foresees  control  by  the  men  with  smaller  property 
interests  and  the  small  landholder  fears  domination  by  his  more  power- 
ful associates.  But  the  history  of  the  co-operative  movement,  both  in 
Europe  and  in  the  United  States,  proves  clearly  that  this  adverse 
sentiment  is  merely  a  fear  and  not  an  actual  result  of  practical  oper- 
ation and  that  danger  arises  more  often  from  inequality  of  voting, 
which  is  likely  to  develop  jealousy  and  a  group  domination  within 
the  organization  and  to  lead  to  the  feeling  that  the  right  of  property, 
rather  than  the  equality  of  men,  is  the  principle  underlying  the  direc- 
tion of  the  organization.  Equality  of  membership,  on  the  other  hand, 
strengthens  the  will  to  co-operate  and  develops,  in  the  man  of  small 
interests,  the  confidence  to  express  himself  on  matters  of  administra- 
tion and  also  creates,  in  those  of  larger  holdings,  a  respect  for  the 
rights  of  the  smaller  property  owner. 

MEMBERSHIP   AGREEMENT 

Co-operative  organizations  must  be  held  together  by  an  agreement 
or  contract  between  the  organization  and  each  individual  member.  It 
is  desirable  that  all  agreements  cover  the  incorporated  life  of  the 
association  and  not  a  short  period  of  time  and  that  the  member  have 


Circular  222       principles  of  co-operation  in  agriculture  11 

the  right  to  withdraw  at  the  close  of  the  fiscal  year  whenever  he  shall 
have  given  notice  in  advance  of  his  intention  to  do  so.  This  enables 
the  management  to  know  definitely  what  it  is  expected  to  do,  to  gauge 
the  volume  of  business  to  be  handled,  to  estimate  the  expenses  to  be 
incurred  and  the  obligations  to  be  met,  and  to  make  the  preparation 
necessary  to  conduct  its  affairs.  Without  such  contract  or  agreement, 
especially  in  a  new  association,  no  organization  can  achieve  the  degree 
of  permanency  and  integrity  that  is  essential  to  a  business  undertak- 
ing of  this  kind.  Buildings  and  their  equipment  may  be  needed,  it 
may  be  necessary  to  erect  warehouses,  to  purchase  supplies,  to  develop 
a  sales  agency  and  to  project  a  campaign  of  advertising  over  a  number 
of  years.  Timber  lands  for  box  material — with  lumber  mills  and  box 
factories — have  even  been  acquired  by  the  most  successful  of  these 
organizations.  It  is  obvious  that  such  undertakings  can  only  be 
accomplished  when  there  is  a  definite  membership  responsibility  cover- 
ing a  reasonable  period  of  time. 

No  form  of  contract  will  hold  the  membership  together  indefinitely 
unless  the  benefits  of  the  organization  justify  its  continuance  but  the 
human  side  of  some  men  has  not  yet  evolved  to  that  ideal  state  in 
which  a  temporary  advantage  offered  them  may  not  blind  them  to 
the  permanent  values  of  their  own  association.  Therefore,  voluntary 
membership  is  not  practicable.  Always,  too,  there  are  opportunists 
who  take  no  interest  in  the  real  problems  of  agriculture  and  do  not 
see  their  position  as  part  of  a  great  working  whole — that  is,  they  have 
little  consciousness  of  the  larger  factors  influencing  the  disposition 
of  crops,  and,  in  their  disposal,  are  rampant  speculators  buying  and 
selling  to  individual  merchants  and  speculators.  The  opponents  of 
the  co-operative  system,  understanding  this  psychology,  tempt  the 
speculative  farmer  with  offers  of  high  prices  as  a  means  of  strength- 
ening themselves  in  the  community  and,  unless  this  type  of  producer 
has  formally  bound  himself  to  his  association  by  a  contract  to  handle 
all  of  his  produce  through  it  for  a  given  time,  the  buyers  may  draw 
heavily  from  the  membership  and  thereby  weaken  its  financial  and 
business  stability.  A  large  proportion  of  the  failures  in  co-operative 
marketing  have  been  due  to  the  irresponsibility  of  the  membership 
when  an  association  has  been  subjected  to  competitive  fire.  Then  if 
the  association  has  insurred  liabilities,  based  on  the  expected  loyalty 
of  its  members,  it  finds  itself  not  only  with  a  reduced  membership 
but  also  with  a  correspondingly  reduced  income  with  which  to  meet 
its  liabilities.  Though  the  contract  is  essential  to  stabilize  an  associa- 
tion, it  is  clearly  apparent  that  the  best  success  will  only  follow  when 
a  majority  of  its  members  are  convinced  that  the  co-operative  principle 


12  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

is  most  beneficial,  ultimately.  This  conviction  will  be  strong  enough 
to  hold  them  together  when  their  opponents  attack  them — providing 
it  is  reenforced  by  the  successful  returns  of  the  association  itself  in 
the  management  of  its  business. 

It  is  equally  true  that  all  questions  which  affect  the  permanently 
successful  development  of  an  industry  can  only  be  worked  out  by  the 
producers  themselves  because  no  one  but  the  producer  has  a  primary, 
vital  interest  in  production.  The  national  distribution  and  marketing 
of  a  rapidly  increasing  crop,  the  development  of  new  markets,  co- 
operation with  the  wholesale  and  retail  trade  for  the  purpose  of  evolv- 
ing the  best  methods  of  salesmanship,  national  advertising  to  increase 
the  consumption  of  products  are  the  vital  arteries  through  which  an 
industry  grows  and  can  only  be  developed  co-operatively.  The  buyers 
of  agricultural  crops  are  not  sufficiently  organized  to  deal  with  any 
of  these  broad  industry  problems  in  a  comprehensive  way.  While 
the  growers'  primary  interest  is  in  the  permanent  prosperity  of  his 
industry,  the  buyer  is  primarily  interested  in  the  success  of  his 
immediate  transactions.  Therefore,  it  is  to  the  man  who  owns  the 
land  and  whose  investment  runs  into  the  future  that  we  must  look 
to  incur  the  financial  liabilities  that  safeguard  the  life  of  the  industry. 

THE    MANAGEMENT    OF    A    CO-OPERATIVE    ASSOCIATION 

The  management  of  a  co-operative  organization  is  vested  in  a  board 
of  directors  and  a  manager  selected  by  them.  The  directors  are  the 
legal  representatives  of  the  stockholders,  or  members,  and  are  respon- 
sible for  the  general  welfare  of  the  organization.  The  manager  is  the 
executive  head  of  the  organization.  The  general  powers  of  the  associa- 
tion should  be  exercised  and  controlled  by  the  board  of  directors  and 
upon  the  strength  of  this  board  will  depend  the  stability  of  the  associa- 
tion. Each  director  should,  of  course,  reflect  the  sentiment  of  his 
constituents  and  should  generally  be  governed  by  them  in  making 
his  decisions,  but  he  should,  naturally,  have  had  broad  business  experi- 
ence and  be,  in  a  position,  therefore,  to  see  the  problems  of  the  organ- 
ization in  deeper  perspective  than  the  average  individual  grower.  He 
must  not  fail  to  exercise  his  independent  judgment,  uninfluenced  by 
prejudice  or  local  pressure. 

No  co-operative  association  can  succeed  unless  it  has  the  services 
of  a  manager  who  is  competent  to  handle  the  unique  duties  that  are 
incident  to  that  position,  and  to  surround  himself  with  able  associates. 
The  association  will  grow  in  proportion  to  the  vision  which  its  manager 
shows  in  foreseeing  the  needs  of  the  organization  and  in  presenting 


Circular  222         PRINCIPLES   OF    CO-OPERATION    IN   AGRICULTURE  13 

them  for  the  consideration  of  the  directors.  He  must  possess  keen 
discrimination  in  the  selection  of  associates  who  are  competent  to 
handle  their  respective  duties,  and  display  sympathy  and  under- 
standing in  the  development  of  their  initiative  and  capacity  for 
responsibility,  if  the  work  is  to  be  successfully  co-ordinate,  and  the 
organization  act  as  a  complete  unit. 

The  lack  of  vision  displayed  by  the  members  of  many  co-operative 
associations  lies  in  their  failure  to  appreciate  the  value  to  themselves 
of  a  high  order  of  ability  on  the  part  of  their  employees.  Dealing 
with  complicated  business  problems,  and  with  men,  has  not  been  a 
part  of  the  farmer's  experience  and,  not  being  skilled  in  maintaining 
these  relationships,  he  underestimates  the  grade  of  ability  needed  to 
manage  a  business  of  an  agricultural  organization.  Failures  because 
of  inefficient  management  are  usually  traceable  to  an  unwillingness 
on  the  part  of  the  membership  to  offer  salaries  which  are  adequate  to 
attract  efficient  employees.  The  individual  producer  is  likely  to  gauge 
the  tasks  of  management  by  the  size  of  his  own  business  and  too  often, 
his  judgment  falls  short  when  he  assumes  the  responsibility  of  pro- 
viding the  management  for  a  collective  business. 

It  is  difficult  to  overestimate  the  delicacy  of  many  problems  con- 
nected with  the  management  of  a  co-operative  association  as  compared 
to  those  of  the  usual  corporation.  The  stockholders  of  the  latter 
usually  enter  the  business  as  investors  and  are  not  identified  with  the 
business  as  producers.  The  producer,  on  the  other  hand,  is  vitally 
interested  in  the  details  of  his  own  business  and  he  is  likely  to  take 
an  active  part  in  the  conduct  of  its  affairs.  By  so  doing  he  contributes 
one  of  the  most  valuable  assets  to  co-operation,  and,  if  the  manager 
is  alert  in  utilizing  it,  he  enlivens  the  interest  of  the  growers.  The 
integrity  of  the  management  must  be  beyond  reproach:  it  must  be 
free  from  entangling  business  alliances  and  from  participation  in 
any  secret  profits  arising  directly  or  indirectly  from  handling  the 
business  of  the  organization.  Above  all  it  must  develop  the  principle 
of  the  square  deal. 

Because  any  organization  represents  power — and  the  larger  the 
organization  the  greater  its  power — its  great  danger  lies  in  becoming 
involved  in  political  affairs,  and  in  movements  which,  though  worthy 
in  themselves,  have  nothing  to  do  with  its  primary  purposes  and  can 
only  lead  to  a  divided  membership  and  factional  control  with  ultimate 
disruption.  The  severest  test  put  upon  the  manager,  therefore,  will 
probably  be  that  of  holding  the  organization  to  its  primary  purposes 
and  he  must  be  fearless  of  criticism  in  maintaining  this  policy. 


14  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 


A    CO-OPERATIVE    ORGANIZATION    SHOULD    BE    FOUNDED    ON    A 
SPECIALIZED    CROP 

The  best  results  are  obtained  in  co-operation  when  an  organization 
is  founded  to  handle  a  special  crop  and  when  the  locality  in  which  it 
operates  is  comparatively  limited  in  area.  When  he  steps  outside  his 
sphere  as  a  producer,  the  average  farmer  does  not  often  succeed  except 
in  the  special  agricultural  industries  that  have  been  developed  by  men 
of  unusual  experience  and  ability.  Since  each  industry  has  its  own 
individual  problems  to  solve,  its  special  difficulties  to  overcome,  and 
its  particular  trade  practices  and  connections  with  which  to  deal,  an 
indiscriminate  organization  of  growers  is  generally  very  unsatisfactory 
in  practical  results.  There  are  a  number  of  examples  of  co-operative 
organizations  in  America  that  have  been  formed  to  handle  general 
crops — sometimes  even  operating  through  a  number  of  states — but 
none  of  these  movements  have  been  successful  because  of  the  diversity 
of  needs  of  the  various  products  which  can  only  be  dealt  with  by 
individualized  administration.  To  cite  a  specialized  industry,  which 
has  shown  a  unity  of  organization  never  before  attained  on  the 
co-operative  plan  in  the  United  States,  the  citrus-fruit  growers  of 
California — who  faced  extinction  as  producers  twenty-five  years  ago 
because  of  the  inadequacy  of  their  marketing  practices — are  an  illus- 
tration of  the  advantage  to  an  industry  of  this  exclusive  form  of  crop 
handling.  Because  each  grower  is  interested  in  improving  the  methods 
of  production,  in  enlarging  the  consumption  of  a  rapidly  increasing 
crop,  in  decreasing  the  cost  of  distribution  and  marketing,  in  enlarging 
and  creating  markets,  in  securing  reasonable  transportation  rates  and 
good  service  he  naturally  has  problems  to  solve  and  a  diversity  of 
trade  connections  to  make  which  are  unknown  to  members  of  other 
industries  and  which  can  only  be  met  by  specialized  organizations. 
Should  he  belong  to  an  association  formed  to  handle  general  agricul- 
tural crops,  including  hay,  grains  and  potatoes  or  such  special  crops 
as  dairy  products,  poultry,  deciduous  fruits  and  vegetables,  it  is 
apparent  that  the  administration  of  the  organization  could  not  be 
sufficiently  specialized  to  meet  his  unique  individual  needs. 

A    LARGE    CO-OPERATIVE     MOVEMENT    SHOULD     BE    FOUNDED    ON 

INDEPENDENT    LOCAL    UNITS    WHICH    FEDERATE    FOR 

GREATER    BUSINESS     EFFICIENCY 

A  large  co-operative  movement  should  be  founded  on  independent 
local  units  which,  for  greater  business  efficiency,  federate  and  form 
an  agency  through  which  they  handle  their  common  problems.     This 


CIRCULAR   222         PRINCIPLES    OF    CO-OPERATION    IN    AGRICULTURE  15 

means  that  each  unit  builds  a  packing  house  or  provides  other 
facilities,  employs  a  manager,  installs  the  necessary  equipment — the 
growers  themselves  thereby  owning  and  directing  their  local  units. 
The  central  agency  is  the  co-operative  whole  and  represents  the  per- 
sonnel of  the  combined  societies  in  their  business  and  public  relation- 
ships, but  it  must  never  be  lost  sight  of  that  the  central  body  must  be 
representative  of  active,  independent  units,  rather  than  an  organiza- 
tion which  owns  and  controls  them.  This  is  the  true  democratic 
principle  as  opposed  to  the  autocratic  system  of  organization  and  it 
is  just  as  true  here  as  in  any  other  form  of  co-operative  government 
that  the  individual  unit  must  be  the  foundation.  Any  attempt  to  put 
the  ownership  of  local  plants  or  the  direction  of  local  affairs  under 
the  immediate  administration  of  the  central  agency  is  a  removal  from 
co-operative  principles  to  the  old  form  of  centralized  corporate  owner- 
ship and  management. 

Efforts  are  being  made  to  do  this  very  thing.  Statewide  corpora- 
tions are  being  attempted  in  which  the  farmer  becomes  a  stockholder. 
The  central  association  then  owns  the  equipment  and  facilities  of  each 
local  unit  and  manages  them,  the  farmer  thereby  becoming  a  part 
owner  in  local  facilities  all  over  his  state.  It  would  be  impossible  to 
overemphasize  the  unsoundness  of  such  a  movement  from  the  co-oper- 
ative point  of  view  or  the  lack  of  stability  which  it  presents  as  a 
business  undertaking.  This  instability  is  due  to  the  fact  that  no  man 
takes  as  much  interest  or  becomes  as  active  in  a  situation  removed  from 
him  as  he  does  in  his  own  local,  individual  affairs.  It  is  necessary, 
in  order  to  avoid  confusion,  to  point  out  here  that  there  may  be  cases 
in  which,  by  establishing  one  or  more  general  plants,  under  the  man- 
agement of  the  central  association  for  the  final  finishing  of  their 
product,  a  group  of  local  units  may  be  spared  the  expense  of  each 
establshing  a  similar  plant.  In  that  case  it  is  apparent  that  the  cen- 
tral association  has  merely  become  more  serviceable  to  its  local  units 
and  has  in  no  way  attempted  to  assume  control  over  them. 

The  activities  of  the  central  agency  will,  obviously,  embrace  all 
matters  too  large  to  be  handled  by  the  local  units.  It  will,  naturally, 
represent  the  local  units  in  creating  a  national  sales-agency ;  in  acquir- 
ing timber  lands  for  the  manufacture  of  box  material ;  in  advertising 
the  product  to  the  consumer  under  a  trade-mark  under  which  the 
produce  shall  be  sold  and  in  establishing  grading  rules  to  cover  the 
use  of  the  trade-mark;  in  handling  transportation  matters  or  legisla- 
tion directly  affecting  them  and  in  all  other  common  problems  that  are 
connected  with  the  primary  purposes  of  the  local  units,  But  the 
central  organization  should  never  do  those  things  for  the  local  units 


16  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

which  they  can  do. efficiently  for  themselves.  Rather  should  its  under- 
lying motive  be  to  help  the  local  units  in  the  handling  of  their  own 
problems;  it  should  co-ordinate  their  activities,  assist  the  weaker  asso- 
ciations to  grow,  and,  in  its  capacity  as  representative  of  their  per- 
sonnel as  a  group,  give  their  industry  dignity  and  business  standing 
in  the  state  and  nation  generally.  It  should  never  be  overlooked  that 
the  strength  of  a  co-operative  federation  lies  in  the  vitality  of  its  local 
units  and  that  a  central  agency,  formed  in  this  manner,  can  be  no 
stronger  than  its  individual  components. 

Aside  from  the  principles  of  industrial  democracy  previously  set 
forth,  there  is  no  way  in  which  the  community  spirit  can  so  well  be 
developed  as  by  the  formation  of  locally  controlled  units.  The  product 
of  each  community  differs  from  that  of  every  other  because  of  climate, 
soils,  altitude,  or  other  environmental  factors,  and  such  community 
characteristics  should  be  a  local  asset  and  should  not  be  confused  with 
that  of  any  other  locality.  Not  only  is  it  desirable  that  the  product 
of  a  unit  be  similar,  but,  even  more,  that  its  members  be  personally 
acquainted,  because  confidence  in  one  another  is  so  necessary  to  co- 
operation. Also,  it  is  most  helpful  to  develop  a  community  pride  in 
the  product  and  to  promote  a  spirit  of  emulation  in  the  production 
of  the  highest  grade  possible  to  that  locality.  Each  community  will 
become  known  by  the  quality  of  its  produce  and  should  use  a  separate 
brand  of  identification.  This  local  brand  will  supplement  the  brand 
— or  possibly  the  trade-mark — of  the  central  agency  and  will  be  the 
means  by  which  the  trade  identifies  the  quality  of  the  produce  of  differ- 
ent localities,  while  the  brand  of  the  central  agency  will  become  known 
to  the  public  general^.  No  association  should  use  the  brand  of  the 
central  organization  exclusively  unless  the  character  of  its  product 
is  so  uniform  with  that  of  all  other  members  of  the  central  association 
that  there  are  no  measurable  gradations. 

The  establishment  of  uniform  grades  for  agricultural  produce  is 
one  of  the  most  important  questions  confronting  American  agriculture. 
It  is  important  not  only  to  the  producer  but  equally  so  to  the  consumer. 
The  waste  that  occurs  in  ungraded  and  badly  handled  products  is  one 
of  the  leading  causes  of  the  high  cost  of  distribution  because  this  waste 
must  either  be  deducted  from  the  farmer 's  price  or  added  to  the  legiti- 
mate cost  of  distribution.  It  is  equally  important  to  the  wholesale 
and  retail  dealer  because  a  system  of  merchandising  which  includes 
low  gross  margins  on  the  sales  is  impossible  unless  foodstuffs  are  uni- 
form and  dependable  in  grade  and  in  keeping  quality.  Individual 
farmers  can  not  grade  their  produce  uniformly  unless  it  is  harvested, 
sorted  and  packed  under  the  direction  of  an  association,  because,  even 


Circular  222       principles  OF  co-operation  in  agriculture  17 

after  a  standard  of  grading  has  been  established,  no  two  persons 
can  interpret  it  in  the  same  way.  It  is  obvious,  also,  that  an  individual 
farmer  does  not  grow  enough  produce  to  enable  him  to  establish  a 
reputation  for  its  quality,  particularly  with  the  consumer.  But  when 
the  produce  of  a  community  is  harvested,  graded,  packed  and  sold 
under  rules  and  regulations  established  by  a  local  association,  and, 
carrying  organization  further,  when  the  produce  of  a  number  of 
associations  is  graded  and  sold  under  minimum  standards  established 
by  a  central  agency — then  the  produce  of  a  community,  and  even  of 
a  state,  may  become  known  to  the  trade  and  to  the  consuming  public 
generally. 

It  is  advisable,  at  this  point,  to  enumerate  certain  fundamentals 
of  harvesting,  grading  and  packing,  which,  if  not  understood  by  a 
co-operative  association,  are  likely  to  result  in  its  failure.  Experience 
has  shown  that  the  average  individual  grower  does  not  possess  skill 
enough  in  handling  these  matters  to  enable  an  association  to  establish 
a  standard  grade,  and  therefore  create  a  reputation  for  its  product. 
Bad  handling  in  harvesting  or  packing — which  results  in  poor  keeping 
quality  in  perishable  foods — careless  and  even  dishonest  grading  are 
not  uncommon  conditions  in  associations  in  which  the  handling  of 
the  product  is  controlled  by  the  individual  members. 

A  uniform  grade  can  be  established  by  having  the  product  of  the 
individual  members  handled  under  the  supervision  of  the  association, 
either  by  the  members  themselves,  or,  for  the  members,  by  the  associa- 
tion. The  former  method  is  followed  in  many  deciduous-fruit  asso- 
ciations. The  latter  is  the  usual  method  in  the  citrus-fruit  industry; 
the  association  actually  picking  the  fruit,  delivering  it  to  a  central 
packing-house  and  there  grading  and  packing  it,  thereby  establishing 
not  only  a  uniform  grade  but  uniformity  of  keeping  quality  as  well. 
The  successful  outcome  of  a  co-operative  marketing  association  will  be 
determined  by  the  uniformity  of  the  grades  which  it  offers  for  sale. 

To  have  a  single  organization  cover  a  too  widely  differing  territory 
is  therefore  seen  to  be  undesirable,  and,  because  of  these  reasons,  no 
combination  of  farmers  in  a  central  state  or  nation-wide  organization 
has  yet  been  successful.  On  the  other  hand,  the  most  enduring  co- 
operative efforts  are  those  in  which  local  units  are  confined  to  a 
restricted  elistrict  producing  a  uniformity  of  product,  and  are,  in  turn, 
federated  into  a  central  agency  through  which  they  handle  their 
common  problems. 

It  is  impossible  to  overestimate  the  value  to  a  community  of  a  well 
organized  co-operative  movement.    Producers  form  the  habit  of  work- 


18  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

ing  together,  they  develop  the  will  to  co-operate,  and  this  spirit  of 
co-operation  results  in  a  mutual  working  out  of  all  matters  that  affect 
the  social,  economic,  and  civic  betterment  of  the  community. 

THE    RELATION    OF    THE    PRODUCER    TO    THE    COST    OF    DISTRIBUTION 

There  should  be  the  closest  co-operation  between  a  producers' 
organization  and  those  who  distribute  its  crops  because  the  distributor 
performs  a  vital  service  in  bringing  the  producer  and  the  consumer 
together.  These  distributors,  or  middlemen,  are  necessary  both  to  the 
producers  and  to  the  public  because  it  is  impractical  and  uneconomical 
to  sell  any  large  share  of  our  farm  crops  direct  from  producer  to 
consumer.  As  long  as  such  intermediaries  distribute  farm  crops 
efficiently  and  economically,  considering  the  risks  and  the  investment 
incurred,  but  exclusive  of  excessive  profits,  they  are  economically 
desirable  from  every  point  of  view.  The  average  farmer  is  not  in  a 
position  to  distribute  his  own  crops  directly  to  the  consumer  or  even 
to  the  retail  dealer.  He  has  neither  the  capital  to  assume  the  risk 
nor  the  knowledge  necessary  to  develop  a  far-reaching  mercantile 
agency,  which  not  only  requires  large  amounts  of  capital  but  also  a 
highly  specialized  distributing  organization. 

Even  among  our  largest  agricultural  industries,  there  are  few 
products  grown  in  sufficient  volume  and  with  enough  regularity  in 
supply  from  month  to  month  and  year  to  year  to  warrant  the  experi- 
ment of  building  up  a  jobbing  organization.  The  hazards  of  such  an 
undertaking  should  be  pooled  among  many  farming  industries  through 
our  present  jobbing  system. 

It  is  well  to  point  out  that  there  are  conditions  in  the  wholesale 
trade  that  are  sometimes  detrimental  to  the  interests  of  both  the  pro- 
ducer and  the  consumer.  In  some  cities  the  fruit  jobbing  business,  for 
example,  is  in  the  hands  of  a  few  merchants,  who,  through  "gentle- 
men's agreements"  attempt  to  fix  the  conditions  of  competition,  the 
gross  margins  to  be  added  to  their  sales — usually  adding  abnormally 
high  gross  margins  and  thereby  greatly  restricting  distribution  and 
sometimes  imposing  an  excessive  cost  on  the  consumer. 

The  simplest  method  of  distributing  farm  crops  at  present  in 
commercial  use  utilizes  three  middlemen:  first,  the  wholesale  buyer, 
who  purchases  the  crop  from  the  producer  or  his  association  and  who 
distributes  it  to  the  cities  where  it  is  sold  to  a  jobber;  second,  the 
jobber,  who  sells  it  to  the  retail  dealer;  and  third,  the  retail  merchant, 
who  sells  it  to  the  consumer.     . 

Sometimes  the  producer  consigns  his  commodities  to  a  commission 
merchant,  who,  in  turn,  sells  them  to  a  jobber  or  to  a  retail  dealer; 


Circular  222         PRINCIPLES   OF    CO-OPERATION   IN   AGRICULTURE  19 

or  the  producer  may  sell  through  a  broker  to  the  jobber,  or,  through 
an  auction  company,  to  the  wholesale  or  retail  trade.  In  some  highly- 
organized,  co-operative  farmers'  associations,  the  distribution  of  the 
crop  is  co-ordinated  and  through  a  central  clearing  house  is  sold  direct 
to  the  jobbers  in  all  markets  by  means  of  agents  which  these  co-oper- 
ative organizations  locate  in  the  principal  consuming  centers.  Under 
this  system,  which  is  possible  when  a  large  volume  is  to  be  handled, 
the  initial  cost  of  distribution  to  the  wholesale  trade  is  materially 
reduced. 

There  are  also  a  number  of  more  complicated  methods  of  distribu- 
tion, some  of  which  are  economically  serviceable,  while  others  impose 
an  unnecessary  expense  on  both  producer  and  consumer.  But,  what- 
ever the  system  is,  it  is  usually  the  product  of  a  commercial  evolution 
developed  by  the  conditions  of  production,  the  conditions  of  distri- 
bution in  the  towns  and  cities,  and  the  service  demanded  by  the  con- 
sumer— to  all  of  which  it  has  gradually  been  adapted.  The  gap 
between  the  producer  and  the  consumer  can  be  most  efficiently  and 
economically  bridged  only  when  there  is  a  mutual  understanding 
among  all  of  the  parties  concerned  in  regard  to  the  distributing  prob- 
lems involved,  and  when  the  producers  are  organized  and  in  a  position 
to  co-operate  with  jobbers  and  retailers  in  simplifying  and  reducing 
the  expense  of  distribution. 

Generally  speaking,  the  expense  of  distributing  a  farm  crop  to  the 
consumer — not  including  the  cost  of  transportation  but  only  including 
the  gross  expense  of  the  distributing  agencies — represents  50  per  cent 
of  the  price  paid  by  the  consumer.  In  some  industries  the  gross 
expense  may  be  less,  in  others  even  more.  For  example,  the  gross 
expense  of  distributing  fruit  from  the  producer  to  the  jobbing  trade 
varies  from  1*4  per  cent  of  its  delivered  value,  when  it  is  done  by 
a  highly  organized  producers'  association,  to  7  per  cent  or  more,  when 
handled  by  wholesale  buyers  or  shippers'  agents.  The  gross  margin 
of  the  jobber  in  selling  to  the  retail  trade  varies  from  6  to  15  per  cent 
or  more  of  the  selling  price,  depending  upon  the  character  of  the 
produce  and  the  expense  of  conducting  business  in  the  particular 
locality.  The  gross  margin  of  the  retailer  varies  from  15  to  35  per  cent 
or  more,  depending  on  similar  factors  and  upon  the  class  of  consumers 
served  and  the  amount  of  service,  such  as  credit,  delivery,  etc.,  which 
they  demand  and  for  which  they  must  pay. 

The  expense  of  distributing  a  crop  from  the  producer  to  the  con- 
sumer is  influenced  by  several  factors,  the  first  of  which  is  the  con- 
ditions under  which  the  producer  handles  his  crop.  The  shipment  or 
sales  of  small  lots  of  variable  and  ungraded  produce  by  the  individual 


20  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

farmer  imposes  a  high  expense  on  all  who  handle  it  because  the  buyer, 
the  commission  merchant,  the  jobber  or  the  retail  dealer  can  not  handle 
small  quantities  of  foodstuffs  economically,  and  the  lack  of  uniform 
grades  adds  risks  and  uncertainties.  Volume  is  essential  to  an  econom- 
ical overhead  expense  in  any  business,  and  uniformity  and  regularity 
in  the  supply  is  of  equal  fundamental  importance.  Poor  handling, 
which  results  in  deterioration  after  the  crop  leaves  the  farmer's  hands, 
adds  to  the  expense  of  distribution  and  often  necessitates  repacking 
by  the  shipper,  the  jobber  or  the  retail  dealer,  or,  perhaps,  by  more 
than  one  of  them.  Likewise,  if  the  supply  is  irregular,  the  grading 
variable,  and  the  containers  not  of  standard  type,  those  who  handle 
the  distribution  must  of  necessity  add  a  larger  gross  margin  to  every 
sale  to  cover  the  consequent  risks  and  losses. 

The  first  step  in  making  a  reasonable  cost  of  distribution  possible 
is  the  organization  of  producers,  because  only  in  that  way  can  a  large 
volume  of  standardized  foodstuffs  be  provided  and  sold.  Then,  if 
the  conditions  are  favorable,  the  producers'  organization  can  sell  its 
products  in  the  primary  markets  at  a  lower  expense  than  is  at  present 
possible  for  the  small  individual  buyer  or  the  shippers'  agents.  This 
creates  a  dependable  supply  upon  which  the  wholesale  and  retail 
trade  can  reply  and  specialize,  and  reduces  the  gross  margin  of  profit. 

By  way  of  illustration :  Twenty-five  years  ago,  it  cost  the  unorgan- 
ized citrus-fruit  growers  of  California  from  10  to  15  per  cent  or  more 
to  have  their  fruit  sold  to  the  jobbers.  At  the  present  time,  it  costs 
the  individual  grower  from  7  to  10  per  cent  to  sell  it  in  the  same 
manner.  One  producers'  organization,  with  eleven  thousand  members, 
distributes  and  sells  through  its  own  agents  seventy-five  million  dol- 
lars' worth  of  citrus  fruit  annually  to  the  jobbers  of  the  United  States 
and  Canada  at  a  total  marketing  cost  of  less  than  iy2  per  cent  of  its 
delivered  value.  It  furnishes  regular  supplies  of  uniformly  graded 
fruit  to  the  different  markets,  and  the  jobbers  and  retail  dealers  are 
selling  this  fruit  at  gross  margins  not  much  larger  than  those  applied 
to  the  sale  of  non-perishable  foodstuffs  and  at  the  lowest  gross  margins, 
so  far  as  we  know,  that  are  applied  to  any  other  fruit  crop. 

The  gross  margins  added  by  the  wholesale  or  retail  trade  depend 
also  on  the  system  of  merchandising  which  they  adopt.  Many 
merchants  operate  with  a  relatively  small  volume  and  a  high  gross 
margin  of  sale,  but  the  average  up-to-date  merchant  turns  his  stock 
quickly  at  a  low  gross  margin  per  sale  and  at  the  end  of  the  year 
has  made  a  larger  net  profit  because  his  volume  of  business  has  been 
enlarged.  He  has  also  had  less  loss  from  spoilage  in  his  product 
because  of  its  quick  sale.    It  is  possible  to  reduce  the  expense  of  dis- 


Circular  222       principles  of  co-operation  in  agriculture  21 

tribution  from  the  wholesale  trade  to  the  consumer  by  a  wider  adoption 
of  the  principle  of  quick  sales  to  bring  larger  volume  at  lower  gross 
margins  per  sale,  thereby  benefiting  both  the  dealer  and  the  consumer. 
This  question  is  of  such  vital  importance  to  the  producer  that  one 
of  the  citrus-fruit  producing  organizations  maintains  an  educational 
department  through  which  it  co-operates  with  the  wholesale  and  retail 
trades  in  the  development  of  the  most  effective  methods  of  fruit 
salesmanship — a  co-operation  which  has  been  universally  welcomed 
by  the  trades. 

There  is  no  mystery  connected  with  the  distribution  of  the  nation's 
farm  supplies,  and  there  are  few  reforms  that  can  be  instituted  in  the 
distributing  system  unless  it  be  through  the  development  of  such 
fundamentals  as  we  have  been  considering.  The  adjustment  between 
the  producer,  the  transportation  agencies,  the  various  classes  of  mid- 
dlemen, and  the  consumer  is  a  subject  of  endless  conflict.  In  the  past, 
there  has  been  much  dissatisfaction  with  the  distributing  system, 
arising  from  the  oppression  of  the  producer  by  low  prices,  or  of  the 
consumer  by  high  living  costs.  There  is  a  popular  feeling  that  the 
distributing  agencies  receive  a  maximum  return  on  their  capital  and 
labor,  or,  at  least,  that  they  have  organized  the  distributing  system  in 
such  a  complicated  way  that  the  producer  is  often  prevented  from 
sharing  in  the  general  prosperity  to  the  extent  that  he  feels  his  capital 
and  labor  have  contributed,  and  that  there  is  too  great  a  difference 
between  the  price  which  the  farmer  receives  for  his  product  and  that 
which  the  consumer  pays.  The  consumer  is  equally  disturbed  and 
feels  that  he  pays  too  high  a  price  to  the  distributing  agencies,  when 
fifty  cents  out  of  every  dollar's  worth  of  food  purchased  covers  the  cost 
of  its  distribution. 

It  is  clear  to  those  who  have  given  deepest  study  to  the  subject 
that  although  present  abuses  and  unfair  and  dishonest  practices  may 
be  eliminated,  the  principal  reforms  possible  in  the  distributing  system 
are  in  the  handling  of  farm  crops  under  conditions  which  permit  of 
more  economical  methods  of  merchandising. 

These  fundamental  conditions  are  of  such  vital  importance  as  to 
bear  restating.  They  include,  on  the  part  of  the  producer,  the  organ- 
ization of  co-operative  associations  through  which  a  large  volume  of 
standardized  food  products  can  be  sold  with  the  waste  reduced  to 
a  minimum  by  careful  handling,  as  well  as  the  elimination  by  them 
of  all  unnecessary  middlemen  between  their  organization  and  the 
wholesale  trade  in  the  cities  and  towns.  On  the  part  of  the  wholesale 
and  retail  dealers,  it  includes  the  adoption  of  the  most  economical 
method  of  distribution — a  condition  which  can  be  best  promoted  by 


22  UNIVERSITY    OF    CALIFORNIA — EXPERIMENT    STATION 

dealing  in  standardized  products  of  uniform  grade;  and,  on  the  part 
of  the  consumer,  it  includes  the  realization  of  the  service  which  modern 
living  conditions  have  imposed  on  the  retail  dealer.  As  long  as  the 
consumer  buys  his  supplies  in  small  quantities  under  an  expensive 
system  of  delivery  and  other  service  he  is  imposing  on  himself  an 
expense  which  no  one  else  can  lower. 

There  should  be  no  antagonism  between  the  producer,  the  dis- 
tributing agencies  and  the  consumer.  They  are  all  living  under  con- 
ditions imposed  on  them  by  the  present-day  methods  of  industrial  and 
social  life.  Rather  there  should  be  a  careful  study  of  the  fundamental 
factors  affecting  distribution  and  a  readjustment  of  practices  on  the 
part  of  every  one  concerned  which  will  result  in  greater  simplicity  and 
economy  in  the  distribution  of  foodstuffs. 

Such  other  changes  as  may  be  desirable  in  the  interest  of  economy 
and  the  creation  of  confidence  in  the  distributing  system  include  the 
development  of  wholesale  terminal  markets,  the  establishment  of  retail 
centers  and  improvements  in  the  facilities  of  transportation,  but,  im- 
portant as  these  are,  they  are  secondary  to  the  fundamental  factors 
outlined  above.  It  is  also  desirable  to  point  out  that  though  both  the 
producer  and  the  consumer  have  ever  been  ready  to  invoke  the  aid  of 
the  law  to  save  them  from  the  fate  of  modern  conditions,  any  effort 
to  reduce  the  cost  of  distribution  through  legislation — except  as  it 
furnishes  a  sounder  basis  for  the  organization  of  producers,  establishes 
legal  grades  and  standards  for  farm  crops,  prevents  unfair  or  dis- 
honest practices  by  producers  or  by  the  trades — is  likely  to  result  in 
the  future,  as  it  always  has  in  the  past,  in  disappointment.  Anything 
that  may  be  accomplished  by  the  state  or  nation  to  help  the  farmer 
to  a  better  understanding  of  his  problems,  as  well  as  to  educate  the 
trades  and  the  consumers,  is  in  the  interest  of  the  public  generally. 

THE    FUTURE    OF    CO-OPERATION 

The  future  of  co-operation  rests  not  only  upon  the  ability  with 
which  growers  handle  their  business  problems,  but  upon  how  well  they 
meet  the  present,  vital  questions  which  are  leading  to  world-wide  social 
and  economic  unrest.  A  co-operative  organization  can  not  live  for 
itself  alone.  It  must  scrupulously  fulfill  its  public  or  social  relation- 
ship as  well  as  its  relationship  to  its  own  members. 

A  co-operative  organization  of  fruit  growers,  for  example,  should 
be  an  important  factor  in  reducing  the  cost  of  living,  as  well  as  in 
insuring  the  growers  a  fair  price  for  their  fruit,  if  it  is  to  play  a  vital 
part  in  future  social  and  economic  life.     The  producer  is  entitled  to 


) 


Circular  222       principles  of  co-operation  in  agriculture  23 

a  fair  return  on  the  cost  of  production,  if  the  law  of  supply  and 
demand  warrants  it,  but  he  is  not  privileged,  through  the  power  of 
organization,  to  impose  a  higher  price  on  the  consumer  than  the  law 
of  supply  and  demand  justifies. 

With  the  rapid  rise  in  costs  during  the  last  few  years,  efficiency 
in  production  and  marketing  has  become  even  more  vital  to  the  farmer, 
as  well  as  to  the  public.  The  prices  received  for  perishable  farm 
products  are  determined  by  the  conditions  of  supply  and  demand, 
and  the  impact  of  world  wholesale  prices,  while  costs  of  production 
exert  only  a  remote  influence. 

The  farmer  finds  it  difficult  to  pass  on  to  the  consumer  his  increased 
costs.  With,  for  example,  an  increase  in  freight  rates,  he  finds  himself 
at  a  disadvantage  in  comparison  with  the  manufacturer  who  deter- 
mines his  selling  prices  on  the  cost-plus  basis.  The  farmer,  who, 
through  years  of  expensive  care,  has  brought  his  orchards  into  bear- 
ing, can  not  suddenly  curtail  his  production  when  the  public  refuses  to 
pay  a  price  that  will  leave  him  a  fair  return  on  his  labor  and  invest- 
ment. He  can  get  only  what  the  public  is  willing  to  pay.  Increased 
costs  of  materials,  or  increased  freight  rates,  for  example,  do  not  of 
themselves  make  buyers  willing  to  pay  more.  But  the  producer  of 
perishables  must  sell,  even  at  a  loss,  or  allow  his  products  to  rot  in 
the  fields,  or  perhaps,  send  them  to  by-products  plants  at  a  very 
moderate  return. 

Economy  in  production,  efficiency  in  packing,  intelligent  distribu- 
tion, thorough  standardization,  the  elimination  of  decay,  co-operative 
purchasing  of  supplies,  the  development  of  by-products,  and  a  sys- 
matic  effort  to  stimulate  demand  constitute  the  growers'  opportunity 
to  meet  rising  costs.  And  to  avail  himself  of  these  opportunities 
requires  co-operation,  the  handling  of  a  large  volume  through  a  cen- 
tral agency,  and  a  high  type  of  organization. 

The  co-operative  association  that  accomplishes  these  economies  and 
reforms  is  reducing  the  cost  of  production  and  marketing,  and  con- 
ferring a  direct  benefit  upon  both  producer  and  consumer. 

These  are  public  obligations  that  should  be  inherent  in  the  legal 
privilege  of  producers  to  organize.  They  are  responsibilities  which 
no  co-operative  organization  can  ethically  avoid.  No  group  of  pro- 
ducers has  the  right  to  operate  collectively  if  it  uses  its  power  of 
organization  to  restrict  production,  to  lessen  or  arbitrarily  control  the 
supply,  to  permit  avoidable  wastes  that  result  from  improper  handling 
in  preparing  produce  for  market,  to  speculate,  to  make  profits  not 
resulting  from  the  law  of  supply  and  demand,  to  create  any  condition 
through  the  power  of  organization  that  is  discriminatory  or  unfair 


24  UNIVERSITY    OF    CALIFORNIA EXPERIMENT    STATION 

to  the  public  or  to  a  competitor,  or,  which  permits  a  member,  an  officer, 
or  an  employee  any  advantage  or  preference  that  is  not  open  to  all 
alike. 

A  large  share  of  the  cost  of  food  is  represented  in  the  expense  of 
selling  and  marketing.  As  a  public  question,  co-operation  takes  on 
vital  significance  in  these  times  of  high  living  costs  on  account  of  the 
flow  of  population  towards  the  cities.  It  must  gain  a  new  impetus 
and  a  new  vision  by  standardizing  its  products  and  handling  them 
with  a  minimum  waste,  and  by  simplifying  the  distributing  process 
and  reducing  its  cost  it  helps  to  meet  a  present,  urgent  social  and 
economic  need.  Unless  a  producers'  organization  confers  a  benefit  on 
the  public  at  large,  as  well  as  upon  the  industry  which  it  represents, 
its  future  as  a  vital  part  of  the  social  and  industrial  fabric  of  the 
country  is  problematical.  Its  willingness  and  success  in  meeting  such 
tests,  as  well  as  its  ability  to  serve  its  members,  will  determine  how 
large  a  part  co-operation  will  play  in  the  future  growth  of  American 
agriculture. 


